August 17, 1998 was one of those days that stays with you forever. This was the day Russia decided i...
August 17, 1998 was one of those days that stays with you forever. This was the day Russia decided it could no longer honour its debt obligations. Institutions played at outdooming each other, as they contemplated the possible demise of emerging markets as a credible asset class.
The spread on the JP Morgan Emerging Market Bond Index soared and for a few fleeting moments the global banking system held its breath.
That was four years ago and the banking system survived and emerging markets have never looked back, with now an interesting (if not entirely clear) outlook for both the hard currency ($ and Euro) and local currency sectors.
On the one hand, yields are still significantly attractive for new monies and this has facilitated a dramatic rise in mutual funds growth in 2002 already.
On the other hand, with emerging market assets already posting a near 7% return for this year, it would be reasonable to expect some correction.
However, people like to draw comparisons from the past, with 1994 probably the best reference point (Fed tightening) and this could cause some anxiety. While that scenario looks closer to the one the Fed is facing now, emerging markets have undergone a number of changes.
First and foremost, there is less reliance on short-term debt (although Brazil still needs to do more work). Also countries are in a better position to take advantage of a global pick-up in growth.
Additionally, the investor base has matured. The events of the last year stand testament to this with the demise of Argentina barely causing a ripple to global emerging market assets.
Indeed, despite the machinations of Argentina, Russia still managed to post a return of over 50%.
Diversification within the emerging market has become a key feature as well as diversification across different asset classes. Eastern European local currency markets also face a more testing time. Or, more accurately, investors face a more challenging task as these markets become less of a one-way play.
Politics as ever looms large, with elections in Brazil being the most prominent. Elections are also due in Hungary and investors will be watching closely to see if a new party decides to steer a different course to that laid down by the EU convergence criteria.
The IMF will also have its work cut out balancing the interests of less-than-compliant US congress and the needs of the economies it is trying to aid, with Ecuador springing to mind as the first big test.
Having said all this, the JP Morgan Emerging Market Bond Index is currently standing at 600 bps over US Treasuries. The asset class has come a long way since the low point in 1998, showing remarkable resilience in the face of adversity and a desire to mature.
Sustainable growth likely.
Asset class provides good diversification.
Much greater level of fiscal discipline.
Staying invested could prove lucrative
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